Cirrus Logic, Inc. (NASDAQ:CRUS) develops analog and mixed-signal integrated circuits (ICs) for a range of consumer and industrial markets. With earnings a couple weeks out, favorable technical momentum in CRUS shares and Cirrus Logic part of the Apple Inc. (NASDAQ:AAPL) supplier ecosystem; the time is right to consider biting into a bullish, but equally important, hedged vertical.
Apple can be a game-changer for a smaller company looking to capitalize on the tech behemoth’s sprawling reach in today’s mobile computing age. For Cirrus Logic’s part, this relationship between supplier and customer stands at a whopping 80% of its revenues, and one driven in large part by the iPhone product line.
This past year’s iPhone 6 and iPhone 6 Plus wowed consumers and rightly silenced more than a few of Apple’s detractors. And while that’s no doubt great for Cirrus Logic, so much reliance on one customer does conjure up images of living and dying by the sword or in this case, by Apple.
Ask GT Solar shareholders about the dark side of that relationship as that company proceeds through bankruptcy court.
Caveat aside, nobody is suggesting a repeat of GT Solar in the foreseeable future and the circumstances were different as both a product loss and substantial loan to Apple were involved. However, while Motley Fool notes a strong business relationship that’s worked well fundamentally for both Cirrus Logic and Apple, it hasn’t always resulted in consistent price action for CRUS shares.
Cirrus Logic Trading Chart
Referring to the chart above, reaction in CRUS shares over the past five earnings reports (denoted by the blue triangles) has yielded more pressure in the stock than not. While corporate confessionals are more than just a single number, the general lack of support by investors has occurred despite Cirrus Logic beating earnings estimates for each individual earnings release.
The good news is this difficult price action in CRUS is part of a much larger weekly corrective base (not shown) that’s developed since shares of CRUS hit its highs back in late 2012. Additionally and since gapping higher in late 2014 on a broker ‘non-Apple’ upgrade, continued technical follow-through in 2015 has established CRUS as a top performer with a gain of about 42%.
Shares of CRUS have gone on to digest its quick gains with a lateral trading range. The consolidation is constructively tight at just more than 10% in width and now in its sixth week of development. What’s more, CRUS’ base building is occurring smack between the 50% and 62% retracement levels from the 2012 high to near-equal cycle lows tested in 2013 and twice in 2014.
Were a breakout to occur, the next logical resistance would be near $39 and the 78% retracement level.
CRUS Earnings Bull Vertical
Earnings are set for Cirrus Logic on April 28 after the market close. Given what I’d interpret from the chart as rising, slightly expensive implieds (solid blue line) and its mixed earnings history; a bull call vertical is attractive. A vertical spread in CRUS will hedge some of the volatility and directional risk compared to an outright long call position; making it a more conservative and practical way to position bullishly for earnings.
Checking the board for vertical positions, the May $34/$37 bull call spread looks attractive. Priced mid-market for $1 per spread, the trader breaks even at $35, which would put shares of CRUS marginally through its current trading range highs of $34.50 and 62% Fibonacci retracement level.
Using May does require CRUS to pull off a less common bullish reaction over the next five weeks in order to make money or otherwise see an entire loss of premium. However, there are more than two weeks following the announcement for CRUS to shake off any post-earnings Doubting Thomas’s if required.
And should shares of CRUS stage a successful breakout, a move of about 7% would result in $2 profit above $37 and return of 200% on investment for the vertical.
As of this writing, investment accounts under Christopher Tyler’s management do not own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.
